Chapter 6: Business Formation

What are the disadvantages of sole proprietorships?

-Limited financial resources -Unlimited liability -Limited ability to attract and maintain talent -Heavy workload and responsibilities -Lack of permanence

What are the advantages of C Corporations?

-Limited liability -Permanence -Ease of transfer of ownership -Ability to raise large amounts of financial capital -Ability to make use of specialized management

What are the advantages of LLCs?

-Limited liability -Tax pass-through -Simplicity and flexibility in management and operation -Flexible ownership

Details on Formation of General Partnerships

-No limit to the number of partners -Verbal or written agreement details out... -->Initial financial contributions -->Specific duties and responsibilities -->How profits and losses will be shared -->How disagreements will be settled -->How a partner's death or withdrawal will be dealt with

Limited Liability

-Owners are not personally liable for claims against firm -Owners may lose investment in the company, but other personal assets are protected

Horizontal Merger

Definition: -Combination of firms in the same industry Common Objective: -Increases size and market power within the industry -Improves efficiency by eliminating duplication of facilities and personnel

Conglomerate Merger

Definition: -Combination of firms in unrelated industries Common Objective: -Reduces risk by making the firm less vulnerable to adverse conditions in any single market

Vertical Merger

Definition: -Combination of firms that are at different stages in the production of a good or service, creating a buyer-seller relationship Common Objective: -Provides tighter integration of production and increased control over the supply of crucial inputs

Articles of Incorporation

Document filed with a state government to establish the existence of a new corporation

What are the advantages of Franchises?

-Less risk -Training and support -Brand recognition -Easier access to funding

What are the disadvantages of C Corporations?

-Expense and complexity of formation and operation -Complications when operating in more than one state -Double taxation of earnings and additional taxes -More paperwork, more regulation, and less secrecy -Possible conflicts of interest

Limited Liability Company (LLC)

-Formed by filing a document and paying filing fees to the respective state -LLC organizers draft an operating agreement -Neither a corporation nor a partnership --->Owners are called members and manage their own company under an agreement --->Hire professional managers

Limited partnership

-General partners: Participate fully and assume unlimited personal liability -Limited partners: Cannot actively participate and are protected by limited liability

Franchise

-Is a licensing arrangement -Franchisor allows franchisees to use its name, trademark, products, business methods, and other property

What are the two methods of corporate restructuring?

-Acquisition: One firm buys another -Merger: Two formerly independent business entities combine to form a new organization

What are the disadvantages of LLCs?

-Complexity of formation -Annual franchise tax -Foreign status in other states -Limits on types of firms that can form LLCs -Differences in state laws

Franchise Agreement

-Contractual arrangement specifying duties and responsibilities of parties involved -Terms and conditions: -->Fees and other payments -->Training and support -->Specific operational requirements -->Conflict resolution -->Assigned territory

What are the disadvantages of Franchises?

-Costs -Lack of control -Negative halo effect -Growth challenges -Restrictions on sale -Poor execution

Franchise Disclosure Document (FDD)

-Detailed description of all aspects of a franchise -Should be provided to franchisee at least fourteen calendar days before franchise agreement is signed

What are the advantages of sole proprietorships?

-Ease of formation -Retention of control -Pride of ownership -Retention of profits -Possible tax advantage

What are the 4 forms of Business Formation?

-Sole proprietorship: Single owner actively manages the company -Partnership: Two or more people act as co-owners of a business for profit (GENERAL PARTNERSHIP) -Corporation: Business is considered a legal entity that is separate and distinct from its owners (ARTICLES OF INCORPORATION and LIMITED LIABILITY) -Limited liability company (LLC): Offers both limited liability to its owners and flexible tax treatment

Divestiture

-Transfer of total or partial ownership of firm's operations to investors or to another company -Spin-off: Company issues stock in one of its own divisions and sets it up as a separate company -Carve-out: Company sells the stock to outside investors, thus raising additional financial capital

What are the disadvantages of General Partnerships?

-Unlimited liability -Potential for disagreements -Lack of continuity -Difficulty in withdrawing from a partnership

What are the advantages of General Partnerships?

Ability to: -Pool financial resources -Share responsibilities -Capitalize on complementary skills Ease of formation Possible tax advantages

Nonprofit corporation

Advantages: -Earnings are exempt from federal and state income taxes -Members and directors have limited liability -Individuals who contribute money or property to the nonprofit can take a tax deduction, making it easier for these organizations to raise funds from donations Limitations: -Has members but cannot have stockholders -Cannot distribute dividends to members -Cannot contribute funds to a political campaign -Keep accurate records and file paperwork to document tax-exempt status

S Corporations

Advantages: -The IRS does not tax earnings separately, thus avoiding the problem of double taxation -Stockholders have limited liability Limitations: -No more than 100 stockholders -Each stockholder must be a U.S. citizen or permanent resident

Statutory close or closed corporation

Advantages: -Operate under simpler arrangements than conventional corporations -All owners can actively participate in management while still having limited liability Disadvantages: -Number of stockholders is limited -Shares cannot be sold without first offering the shares to existing owners -Not all states allow this type of formation

General Partnership

All partners actively manage business and have unlimited liability for any claims against firm

Limited liability partnership

All partners participate in management and have limited liability for company debts

Corporate bylaws

Govern how a corporation is organized and how it conducts its business

Board of Directors

Individuals elected by stockholders to represent their interests

C Corporation

Legal business entity that offers limited liability to all of its owners

Stockholder

Owner of a corporation

Franchisee

Pays for the right to use resources supplied by the franchisor

Institutional Investor

Pool contributions from investors, clients, or depositors and use them to buy stocks and securities

Franchisor

Supplies resources in exchange for money and other considerations